My Big Fat CEO Paycheck...
Apr. 4th, 2005 06:08 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
semiotic_pirateApril 3, 2005
EXECUTIVE PAY : My Big Fat C.E.O. Paycheck
By CLAUDIA H. DEUTSCH
THE spectacle of once-respected corporate titans doing perp walks - Martha Stewart, Bernard J. Ebbers, Richard M. Scrushy, the list seems endless - has pretty well tarnished the title of chief executive. But it has done little, it seems, to scratch the gilt from the corner office.
In fact, the boss enjoyed a hefty raise last year. The chief executives at 179 large companies that had filed proxies by last Tuesday - and had not changed leaders since last year - were paid about $9.84 million, on average, up 12 percent from 2003, according to Pearl Meyer & Partners, the compensation consultants.
Surely, chief executives must have done something spectacular to justify all that, right? Well, that's not so clear. The link between rising pay and performance remained muddy - at best.
Profits and stock prices are up, but at many companies they seem to reflect an improving economy rather than managerial expertise. Regardless, the better numbers set off sizable incentive payouts for bosses.
With investors still smarting from the bursting of the tech bubble, the swift rebound in executive pay is touching some nerves. "The disconnect between pay and performance keeps getting worse," said Christianna Wood, senior investment officer for global equity at Calpers, the California pension fund. "Investors were really mad when pay did not come down during the three-year bear market, and we are not happy now, when companies reward executives when the stock goes up $2."
Even when companies reported modest increases in executive pay, it was often because they shifted from stock options, which are listed as compensation as soon as they are doled out, to outright stock grants to be paid - and accounted for - down the road.
Of course, corporations have been wrestling for decades with ways to link pay to performance, with little success. In the 1980's, they tried tying cash bonuses to rising sales or earnings, only to find that the payouts encouraged executives to make decisions that yielded short-term results - and, often, longer-term disasters.
In the 1990's, companies tried stock options, figuring that they would be the best way to tie the executives' fortunes to those of shareholders. Instead, they prompted some managers to time decisions to pump up the stock just when their options vested. Bonuses and options at Tyco and Enron, for example, did little to prevent widespread accounting frauds at either company.
The secret to linking pay to performance remains elusive. Net income at Eli Lilly fell 29 percent and its return to shareholders dropped 17 percent last year, but its chief executive, Sidney Taurel, saw his pay go up 41 percent, to $12.5 million.
Similarly, Sanmina-SCI, the electronics contract manufacturer, has lost money in each of the last three years, and its shareholders' total return fell 27 percent last year, but the pay of its chief executive, Jure Sola, jumped to $15 million from $1.2 million in 2003.
SOME paychecks remained robust even if at first blush they looked reduced. Net income at Merck fell 15 percent last year, and total shareholder return dropped 28 percent. The summary compensation tables in the proxy show the pay of the chief executive, Raymond V. Gilmartin, dropping 39 percent, to $5.9 million from $9.6 million.
But Mr. Gilmartin may find it easy to recoup the perceived loss. He got far fewer options last year, but he is participating in a new long-term performance plan that will give him $2.7 million worth of shares next year if he meets earnings targets - and double that amount if he exceeds them by a set amount. He gets the shares even if the stock price does not rise by a dime. And the payments won't show up until the 2007 proxy.
Conversely, Apple Computer had a stellar 2004, yet Steven P. Jobs, its chief executive, was paid exactly $1 for his efforts. Why? Apple paid him in advance - in 2003, it gave him $75 million worth of stock.
Shareholders are not giving up on tying pay to performance. But now they seem less focused on how executives are paid and more concerned about exactly what they do to earn it.
"It's easy to manipulate stock price. It's even easier to manipulate earnings," said Paul Hodgson, a senior research associate at the Corporate Library, an investment research firm specializing in corporate governance. He, like others, is pressing companies to set pay based on measures that are harder to fudge, like return on capital employed.
Directors, meanwhile, are spending more time scrutinizing auditor reports and management strategies, looking for just such fudging. And for that, they've been rewarded. Pearl Meyer's data show that average total compensation of directors at 200 large companies probably topped $200,000, up from an average of $176,000 the previous year.
"Directors are meeting more often, so their meeting fees are up," said Jannice L. Koors, a Pearl Meyer managing director, "and there's clearly a sense that the liability they face, both personally and professionally, has increased, and thus warrants more pay."
Inflated pay for deflated performance has become ever more rankling to shareholders, many of whom are still scrambling to recoup the losses they suffered after the stock market imploded in 2000.
Few begrudge Daniel A. Carp, the chief executive of a newly revitalized Eastman Kodak, his $2,172,988 bonus this year, which brought his total compensation to about $4.4 million. But they are likely to squawk about the rich pay package - $7 million in salary and bonus, 5 million options and nearly $27 million worth of restricted stock - that Blockbuster awarded to John F. Antioco, its chief executive. After all, Blockbuster lost $1.25 billion last year.
Pay inflation will not end soon because companies are afraid to lose talent, said Ira Kay, who runs the executive pay practice at the consulting firm Watson Wyatt Worldwide.
Still, companies are rethinking the different pieces that make up a pay package. Many, for example, are reigning in common safety nets for chief executives - like contractual promises of huge severance if the company is acquired, or even if the C.E.O. is fired for incompetence.
They are also increasingly trying to link pay packages - most specifically, the size of bonuses, or the conditions attached to the vesting of restricted shares - to actual corporate performance, particularly total return to shareholders. "Finally, companies are focusing on the performance part of the pay-for-performance equation," Ms. Koors said.
Examples are easy to find. When net income at Aramark, a food services company, slid 13 percent, total pay for Joseph Neubauer, its chairman and chief executive, fell 20 percent - and his bonus shrank 47 percent. When net income at Unisys, the computer maker, plunged 85 percent last year, Lawrence A. Weinbach, then its C.E.O., got no bonus and saw his overall pay drop by 17 percent.
An even starker example is the arrangement for John R. Alm, who became chief executive of Coca-Cola Enterprises, the soft-drink bottler, in January 2004. His contract stipulates that he will lose all his restricted stock if he is no longer at the company when his shares vest in five years. More significantly, he will forfeit all the shares if the stock price has not climbed 10 percent at vesting time, and he will lose half of them if it has not increased by 20 percent.
Still, many shareholders are not satisfied. Reviewing C.E.O.'s pay - and how company boards' compensation committees set it - is at the top of the to-do list for many institutional investors and shareholder activist groups, now that they have succeeded in making companies more forthcoming about revenue, profits and other financial results.
"Whether compensation committees are effectively linking pay to performance is now a major corporate governance concern," said Martha L. Carter, a senior vice president of Institutional Shareholder Services, which advises big investors.
Only one concern - the proliferation of stock options - has abated. A new regulatory requirement to expense options, combined with a sluggish stock market that made many of them valueless in 2000 through 2003, has caused a stampede away from options. Several compensation consultants say they expect that options will soon represent less than 30 percent of total compensation, down from more than 60 percent today.
Not all alternatives are being warmly received. Shareholders decry plans that do not use "hard" measures of performance, such as total return to shareholders. For example, few are applauding Microsoft's two-year-old decision to grant restricted stock on the basis of customer satisfaction and market share, or Disney's plan to tie compensation to performance against the Standard & Poor's 500 index.
Shareholders do want companies to adopt "claw back" provisions that force executives to repay bonuses paid for results that later must be restated, a situation that has kept Qwest, for one, in the news this year.
They are also resisting rich change-of-control clauses that provide windfalls to any C.E.O. whose company is acquired, even if that chief gets a high-ranking job at the new company. The $95 million or so that James M. Kilts will probably receive as a result of selling Gillette to Procter & Gamble is raising ire even among those who laud his performance as Gillette's leader.
They also decry "pay for failure" contracts that heap riches on dismissed chiefs. Carlton S. Fiorina, for instance, left Hewlett-Packard with a severance package that included $14 million in pay, a $7.38 million bonus and $21.1 million in additional compensation from restricted stock holdings and pension payments.
Shareholders complain about how difficult it is for outsiders to glean such things as the tax implications of deferring executive compensation or the worth of supplemental retirement plans and other forms of "stealth compensation" that do not readily leap off the proxy. "The way the proxies are now, you can't really figure out how anyone, even Carly, got paid," Ms. Wood of Calpers said, referring to Ms. Fiorina.
Ms. Carter of Institutional Shareholder Services concurred. "Companies have simply got to do a better job of disclosing total pay packages, and how they play out in different scenarios, such as the C.E.O. being fired or the company being acquired," she said.
In January, for the first time, institutional shareholders, led by Calpers, invited top compensation consultants to a meeting in New York to discuss their concerns - and to persuade the consultants that they were part of the problem.
A TOP complaint was that the consultants feed data to compensation committees piecemeal, reporting what other companies are offering in supplementary pensions one day, the trend on bonuses a few days later, the value of stock options a week after that. The directors, in turn, set the different components of their own chief executive's pay package in equally disjointed fashion.
Consultants acknowledge the problem, and larger firms have begun to add up total compensation, both for peer-group companies and for the client's proposed pay package. "They used to only ask us for information about direct pay, because they got data about benefits and perks from others," said Pearl Meyer, chairwoman of Pearl Meyer & Partners. "But compensation committees are now taking a more holistic approach to executive pay, so we are now giving them all of the information."
Governance experts say the full board increasingly wants a better handle on compensation committee deliberations. Many directors fear that they will all be held accountable for egregious pay packages.
"The Dick Grasso situation has made a lot of directors more cognizant of the need to get the total picture, see how all the pieces - the base salary, restricted stock, options, perks, retirement benefits - add up," said Eleanor Bloxham, president of the Corporate Governance Alliance, a consulting firm in Westerville, Ohio.
She was referring, of course, to the brouhaha that arose when directors at the New York Stock Exchange said they were ignorant of the full extent of the pay package they had approved for the exchange's former chairman, Richard A. Grasso.
Several companies are voluntarily disclosing much more pay information to their shareholders. These companies have replaced what Ms. Koors called "the standard proxy boilerplate" - a statement that pay was set competitively - with fuller descriptions of how boards derived the packages they awarded.
The proxy for Becton Dickinson, for example, included a summary table that laid out the value of total compensation. Honeywell's proxy listed the value of perks like legal fees and personal use of corporate planes and cars. Siebel Systems has promised investors that next year it will begin disclosing the operational and stock-price hurdles that management must scale for restricted shares to vest.
"The companies know that new disclosure rules are coming, so they want an 'attaboy' from shareholders for being ahead of the curve and doing it voluntarily," Ms. Koors said.
Slowly but steadily, companies are responding to shareholders' clamor for pay packages to reward long-term thinking, too. This year's proxies show that companies increasingly insist that executives and directors hold about five times their pay in stock, thus making it harder for them to cash in on any short-term lift in the company's fortunes.
Cardinal Health, for the first time, is requiring its chief executive to hold shares equal in value to five times his salary, and its directors to hold the equivalent in shares of four times their annual retainer. Cendant this year increased its ownership rule for its chief executive to six times salary, from five.
"Companies are basically saying to their chiefs, 'We want to keep you on the hook, to make sure that you are not benefiting from a short-term gain that is not sustainable,' " Ms. Koors said.
EXECUTIVES who do not lead the company down a profitable path may find it harder to develop other ways to cash in.
Thomas J. Neff, the chairman of American operations at the executive recruiting firm Spencer Stuart, says he has seen a move away from grants of restricted shares that automatically vest after three or five years. In their place, companies are giving shares that vest only if the company hits preset goals for book value, total return or other measures the board deems crucial to success.
Mr. Neff says that fewer companies are agreeing to automatically vest all options or restricted shares if the chief leaves and that many now offer one or two years of compensation, maximum, upon departure, a sharp drop from the three to five years of pay that used to be routine. "Boards are no longer routinely letting the C.E.O.'s lawyer draft the contract," he said.
Several companies have clearly learned from past mistakes. The contract of L. Dennis Kozlowski at Tyco International called for an immediate payout of about $135 million if he was dismissed, and a retainer of $3.4 million annually for the rest of his life. His voluntary resignation released Tyco from the terms of the agreement, but directors clearly are cognizant of how expensive fulfilling the contract terms could have been.
Tyco's new severance policy limits compensation to twice the executive's base salary and bonuses at the time of termination. In a merger or change-of-control situation, departing executives would receive up to 2.99 times their base salary and bonus. And Tyco now awards stock options that are priced higher than the share price on the day of issue.
Directors are less likely to clamp down on the pay of newly recruited bosses. Consider the package for C. John Wilder in his first year as the TXU Corporation's chief executive: $1 million in salary, a $16 million bonus and $37 million in long-term incentives.
Newcomers have boards at a negotiating disadvantage, compensation experts say. Because they took a gamble by switching jobs, most successfully insist on either a hefty sign-on bonus in cash and stock, or a soft landing - that is, rich severance - in case they fail.
Both eventualities get shareholders' dander up, but experts say the boards have little choice.
"You need to supercharge the offer," Mr. Neff said, "to create an incentive for a person to come in."
April 3, 2005
An Early Advocate of Stock Options Debunks Himself
By CLAUDIA H. DEUTSCH
FIFTEEN years ago, Michael C. Jensen, a professor at the Harvard Business School, wrote a paper with Kevin J. Murphy, then a professor at the University of Rochester, that trumpeted some pretty radical ideas for the time. Compensation systems, they posited, prompted chief executives to add revenue, not to increase profit, pay dividends or otherwise reward long-suffering shareholders. Their suggestion was to make stock options a big component of top management's pay, ensuring that they do well only if shareholders do well. "It seemed a way to tie managers tighter to the mast," Professor Jensen recalled recently.
Of course, it turned out to be anything but. In far too many cases, stock options tempted managers to pick strategies, schedule deals and investments, even juggle the numbers, so that the company looked best when it came time to exercise those options.
So in 2001, Mr. Jensen, by then a professor emeritus, debunked his own theories in another paper, this time castigating the profusion of stock options in executive pay.
Mr. Jensen, now 65, is still not done with the subject. He has written a book about the issue, tentatively titled "C.E.O. Pay and What to Do About It," that the Harvard Business School Press has scheduled for publication next winter. In a telephone interview from his home in Sarasota, Fla., he expounded on his past and current thoughts.
Q. What made you interested in executive compensation in the first place?
A. All through the 70's and 80's, systems that rewarded bad things and punished good ones arose like moss on trees. Compensation committees rewarded executives for acting like bureaucrats, for growing the size of the company, even if they destroyed products and businesses and market value in the process. That's what led to the conglomerate craze and takeover premiums of the 60's - and why it took the raiders and buyout specialists to sort it all out in the 70's.
Q. So chief executives weren't earning their pay?
A. It's not that I thought C.E.O.'s were overpaid; in fact, I felt they were underpaid in relation to lawyers and other professionals. But it seemed they were paid in the wrong way, independent of whether market value increased or decreased on their watch. Stock options seemed the best way to create an automatic relationship between the reward to the shareholder and the reward to the decision maker.
Q. After you proposed this in the Harvard Business Review, the use of stock options grew rapidly. But then you soured on the idea. Why?
A. Compensation committees wrongly looked at options as free, and awarded too many to too many people. It diluted the stock. And most stock option programs still rewarded management for building the empire, not the actual value. There was no penalty for investing in projects that did not return the cost of capital. When those projects pumped up the stock, management got a big win - but the shareholders would have still done better if the money had been paid out in dividends.
Q. Lots of companies are switching away from stock options to outright grants of restricted stock. Does that solve the problem?
A. No. Say I offer you $1 million in restricted stock - even if you think the stock will go down 10 percent, you're still getting $900,000, and you're happy as a clam. I'd be handing over a large amount of wealth, yet penalizing executives only slightly for the decline in the value of the stock.
Q. So the maximum stock price is the holy grail?
A. Absolutely not. Warren Buffett says he worries as much when one of his companies becomes overvalued as undervalued. I agree. Overvalued equity is managerial heroin - it feels really great when you start out; you're feted on television; investment bankers vie to float new issues.
But it doesn't take long before the elation and ecstasy turn into enormous pain. The market starts demanding increased earnings and revenues, and the managers begin to say: "Holy Moley! How are we going to generate the returns?" They look for legal loopholes in the accounting, and when those don't work, even basically honest people move around the corner to outright fraud.
If they hold a lot of stock or options themselves, it is like pouring gasoline on a fire. They fudge the numbers and hope they can sell the stock or exercise the options before anything hits the fan.
Q. Are you suggesting that executives be rewarded for driving down the price of the stock?
A. I'm saying they should be rewarded for being honest. A C.E.O. should be able to tell investors, "Listen, this company isn't worth its $70 billion market cap; it's really worth $30 billion, and here's why."
But the board would fire that executive immediately. I guess it has to be preventative - if executives would present the market with realistic numbers rather than overoptimistic expectations, the stock price would stay realistic. But I admit, we scholars don't yet know the real answer to how to make this happen.
Q. But then, does it really make sense to judge executives entirely by market value? Why not reward them for setting, and meeting, stretch targets for, say, revenue or profits?
A. It's too easy to game the target-setting process. Nobody has an incentive to provide accurate data or to worry about the company as a whole.
I knew a beverage company manager who deliberately underforecast how much product he could sell during holiday season; the company believed him and cut back on production. It lost a fortune in missed sales, but he got a huge bonus for exceeding his estimates.
I also knew some executives at an equipment company who shipped their product unassembled, so they could book the revenue in a particular quarter. The company spent a fortune on labor to assemble the product in the customer's warehouse. Profits suffered, but the executives got their bonuses.
Q. O.K., then let's stick with the idea of rewarding executives for creating market value. But is it time to abandon stock options and grants, and just link bonuses to stock price?
A. Not at all. A correctly designed option, adjusted for the cost of capital minus the dividends, would not pay off unless an executive really created incremental value. That means executives only get paid if shareholders are in the money, too.
And even better, why not give executives a chance to bet on their own strategies? Let them put their own money into projects they recommend. Or at least make them pay for stock options. If the stock is selling at $100, make them pay $10 for an option they can exercise at $90. That way they at least have a downside.
That also gets to the question of repricing stock options when share prices fall. With most stock plans, that just gives management a heads-I-win-tails-you-lose situation. But it would be O.K. to offer to sell them more options at a lower strike price.
Q. What about indexing options to peer companies? Is it fair to penalize management when an entire industry is out of favor with investors?
A. Yes, it is fair. When you say, "I'll measure your performance relative to your peers in the industry," you remove the incentive to get the company in the right industry. Do you really want executives to say, "I don't care if we're in a declining industry; I'll get my bonus if we're the best."? With that kind of thinking, I.B.M. might have stayed in the typewriter business instead of moving into computers.
Q. Reformers want companies to expense options, or to let shareholders approve pay packages. How much of a difference will these changes make?
A. When boards stop thinking options are free, there'll be fewer options granted, and to fewer people. When companies were forced to recognize the present value of pension obligations and long-term health care provisions, they cut back on those plans.
Q. Does a company's compensation system weigh heavily when you are picking stocks to buy?
A. Hypothetically, it would. But I sold virtually everything I could in March of 2000, and I've continued to sell the illiquid holdings as they became freed up. I got out pretty much whole, and I've never gone back in.
April 3, 2005
Listing Perks, but Not as an Endangered Species
By PATRICK McGEEHAN
PRESSED by shareholder advocates and securities regulators, companies are starting to be more forthcoming about the corporate jets, company cars and other perquisites they give their executives on top of their salaries, bonuses and stock awards. But judging by the latest batch of proxy statements, many companies have not reined in executives' regal lifestyles.
The amounts of money spent on executive perks - as tallied in the catch-all category labeled "other compensation" - vary widely, and they rise and fall inexplicably. Most often, the cash goes to sweeten corporate officers' health care benefits and retirement accounts. But there are other popular perks that stretch beyond the office, like the annual bill for the chief executive's membership in some exclusive club.
When Robert J. Genader was promoted to chief executive of the Ambac Financial Group last year, for example, he received a $100,000 raise in his salary, to $525,000. But he did not use the extra money to cover the $40,000 initiation fee at a club he joined (but has not identified). Ambac shareholders paid for that, as well as $11,637 in membership fees, according to the company proxy.
Ambac shareholders will continue to pay to keep Mr. Genader in good stead at the club, a company spokesman said. But they may not see the bills. Under rules set down by the Securities and Exchange Commission, a company does not have to report any of the perks it hands out to a senior executive as long as the total value does not exceed $50,000 a year.
Sometimes, a single perk easily exceeds that limit. When, for example, Derek V. Smith, the chairman and chief executive of ChoicePoint, a seller of consumer data in Alpharetta, Ga., joined a country club in 2003, shareholders put up $150,000 for his initiation. Last year, his annual club dues were only $21,058, but ChoicePoint had to disclose them as part of his total package of perks, which came to $553,403 and included financial advice and use of the company jet.
Similarly, Bank of America had to disclose that it spent $35,889 for "monitoring and servicing home security systems and the provision of secured parking" last year for Kenneth D. Lewis, its chairman, chief executive and president, only because he received other perks worth $159,000. He was paid $22 million in cash, stock and options.
Some companies, like Commerce Bancorp, leave the perk-picking to its officers. In its proxy last year, Commerce said that from 2001 through 2003, it had given discretionary "expense allowances" of more than $450,000 to Vernon W. Hill II, its chairman, and $150,000 to George E. Norcross III, the chairman and chief executive of its commerce insurance division. That was in addition to country club dues of $3,564 for Mr. Hill and $2,322 for Mr. Norcross.
Honeywell also gives its executives money - "cash flexible perquisite payments" - to spend as they see fit. Last year, four senior executives received a total of $179,000. David M. Cote, the chairman and chief executive, was not one of them, though he had received $55,000 in this category over the two previous years.
Honeywell also gives its top executives an annual allowance - as much as $50,000 each - to spend on perks like financial planning and club memberships, said Robert Ferris, a company spokesman. Last year, four executives spent a total of $179,000, he said.
Those payments were part of a long list of perquisites laid out in a chart in Honeywell's proxy, which has become a model for disclosure, said Paul Hodgson, who analyzes proxy statements at the Corporate Library in Portland, Me. On one page, he said, it listed the nine components of "other annual compensation," from the personal use of company cars and planes to reimbursements for taxes.
For the five highest-paid officers, it added up to more than $850,000 last year, though that was down from more than $1.1 million in 2002, Mr. Ferris said. "Our summary compensation table is a great example of how we are providing information in what we believe is an easier-to-read and more comprehensive format," he said.
The flap over the corporate apartment, flower arrangements and other perks that General Electric gave to John F. Welch Jr. when he retired as its chief executive in 2001 has spurred directors of many big companies to ask more about perks. Some are also sharing the information with the investing public.
Last fall, the Securities and Exchange Commission reached a settlement with G.E. over claims that it did not disclose all the details of Mr. Welch's package, which the S.E.C. said was worth $2.5 million a year. G.E. did not admit any fault but agreed to make a full disclosure of other retirement packages it hands out.
PEARL MEYER, the chairwoman of Pearl Meyer & Partners, the compensation consulting firm in New York, said she had been frustrated by executives' refusal to give up perks that seem the most frivolous.
"We're trying to influence our clients to get rid" of such perks, Mrs. Meyer said. "Executives find it difficult to give up these perquisites, which they see as symbols of their achievement and to which they have formed emotional attachments."
Even some associates in Mrs. Meyer's corporate family have yet to drop the habit, however. The 2005 proxy for Clark Consulting, the parent company of Pearl Meyer & Partners, shows that its chairman and chief executive, Tom Wamberg, received perks worth $101,452, including "personal use of country club and health club dues."
April 3, 2005
A Bad Year for the Chief (but Not for the Bonus)
By ERIC DASH
IT'S hard to find three chief executives who had a tougher year than Carleton S. Fiorina, Raymond V. Gilmartin and Michael D. Eisner. But you would never guess that from the size of their annual bonuses.
At Hewlett-Packard, Ms. Fiorina was forced to step down after directors concluded that her strategy wasn't working. But the board reinstated part of her bonus after a strong fourth quarter, so she still managed to pocket $1.57 million.
At Merck, Mr. Gilmartin collected a $1.38 million bonus for 2004, despite the fact that Vioxx, its top-selling pain medicine, was pulled from the shelves late last year; investors pulled out of the company's stock even faster.
At Disney, Mr. Eisner was the subject of a shareholder revolt. Recently, he announced that he would retire this September, a year earlier than he had planned. No matter. He received a $7.25 million bonus for the company's "greatly improved" fiscal performance in 2004, according to Disney's proxy statement.
The fact that all three made out so well underscores a trend in executive pay last year: the big bonus is back. Over all, the median bonus of chief executives was worth over $1.9 million, up more than 38 percent from the previous year, according to data from Pearl Meyer & Partners for 179 large companies.
But did they earn it? It's hard to say. Boards sometimes base annual bonuses on nonfinancial criteria, like leadership quality, that give them some flexibility.
The bonus bonanza reflects a variety of trends. For starters, profits are up by more than 20 percent across corporate America. And as the growth of executive salaries has slowed, boards have offered higher annual cash rewards to make up some of the difference, compensation specialists say. More recently, the prospect of reporting stock options as expenses has caused more boards to shift from equity-based pay to cash bonuses.
The upshot is that in 2004, the median annual bonus for a C.E.O. was slightly larger than his or her salary, according to an analysis of 293 large public companies by Equilar, the compensation analysis firm. In 2001, it would have approached only two-thirds of base salary.
Bonuses have also been buoyed by tax changes. In the early 1990's, the Internal Revenue Code used tax deductions to encourage companies to link pay to performance goals approved by shareholders. The reforms said nothing, however, about how high or low the bar could be set.
There has been some good news for shareholders. For example, more compensation committees are setting goals based on internal business fundamentals like profit growth, operating margins and investment returns on equity and capital. Fewer are tying bonuses to measures that more easily lend themselves to manipulation, like stock market returns or earnings per share.
"I think there is an evolution of performance measurements that is happening," said Donald Delves, the president of the Delves Group, a compensation consulting firm based in Chicago. "We are seeing better goal-setting."
Even some executives are beginning to realize that things may be getting out of hand. Robert I. Toll, the chief executive and co-founder of Toll Brothers, a luxury housing company, was on track to receive a bonus worth almost $50 million last year amid the recent housing boom.
With the company's share price soaring and Mr. Toll handily meeting all the performance goals set for him, his bonus would have been more than twice the amount he took home in 2003 - and almost eight times the $6.6 million he was awarded in 2001.
But last October, Mr. Toll and the board "mutually agreed" to effectively give back $20 million of his bonus, said Joel H. Rassman, chief financial officer of Toll Brothers.
"Although Mr. Toll believes he is worth a lot of money, he believed the amount of money he would have earned was more than he should be receiving as C.E.O.," Mr. Rassman said. "So did the compensation committee. So did the board."
Now that's something to build on.
Tables: 2004 Executive Compensation
http://www.nytimes.com/2005/04/03/business/yourmoney/03method.html?pagewanted=print&position=
How the Pay Figures Were Calculated
To measure executive compensation, Sunday Business studied 200 large public companies that had filed proxies by Tuesday for last year. Pearl Meyer & Partners, the compensation practice of Clark Consulting, compiled and analyzed the data from corporate filings. The tables appear here and here. For the Hauls of Fame click here.
This study focuses on cash, stock, stock options and other forms of compensation paid to executives in the companies' 2004 fiscal years. The total compensation figures exclude gains from stock options awarded in past years but exercised in 2004. Those gains appear separately, in the column labeled "option profits."
Payments that are called "retention grants," "sign-on bonuses" and other forms of compensation intended to attract or retain executives over a number of years are included in their entirety in the year reported. Prorating these grants and counting only a part of them in the year they were given can be misleading if a company decides to give other multiyear grants before the term of the first award has expired. Showing data on an "as reported" basis offers the truest picture of annual pay. Counting actual pay also highlights years in which companies grant unusually small or large numbers of shares.
To calculate the value of options, Pearl Meyer used a pricing model that has been recommended by accounting rule makers and is similar to the widely used Black-Scholes formula. The model estimates the present value of options grants, based on a number of grant-date assumptions, including the exercise price, the dividend rate, the historical volatility of the stock and the option expiration date. The model also takes into account vesting restrictions imposed on option recipients and the likelihood that the options will be exercised before they expire.
For chief executives who served only part of the fiscal year in that position, the study annualizes their salaries based on either disclosed employment contract information, or prorates their salaries based on their time as chief executive. Other compensation elements are not prorated.
Following are definitions for columns in the tables:
2004 Compensation
BASE SALARY Annual pay that does not depend on the company's results. By law, any amount exceeding $1 million is not tax deductible by the company.
BONUS An annual cash payment that depends on the company's performance or the board's discretion.
RESTRICTED STOCK AND LONG-TERM INCENTIVES The value, as reported by the company, of restricted stock grants plus other cash or equity incentive payments that are tied to multiyear performance. Typically, an executive must remain employed to claim restricted shares. Long-term incentives are usually earned based on the company's results over a three- to five-year period. Restricted stock is generally reported in the year granted; long-term incentives are most often reported in the year paid because their vesting is contingent on meeting certain future performance targets.
TOTAL DIRECT COMPENSATION The sum of the three previous categories and the reported value of "other compensation." Other compensation covers two broad categories: miscellaneous nonperformance pay, like moving expenses and personal use of a corporate jet, and the value of benefits like contributions to 401(k) plans and company-paid premiums for supplemental life insurance. Executives with other compensation of more than $500,000 for fiscal 2004 are noted with a {dagger} symbol.
OPTION GRANT VALUE The estimated value is based on a pricing model that is similar to the Black-Scholes formula.
TOTAL COMPENSATION The sum of total direct compensation and the option grant value.
Pay and Performance
TOTAL DIRECT COMPENSATION The percentage change in salary, bonus, long-term incentives and "other compensation" from 2003 to 2004. This figure is calculated only for companies in which the chief executive held the position for both years. Companies with new chief executives in 2004 are designated as "N.A."
TOTAL COMPENSATION The percentage change in total compensation - direct compensation and options - from 2003 to 2004. This figure is calculated only for companies in which the chief executive held the position for both years. Companies with new chief executives in 2004 are designated as "N.A."
COMPANY NET INCOME The percentage change in the net income from fiscal 2003 to fiscal 2004. The symbol -/+ designates that companies had a profit in 2004 after posting a loss in 2003, and +/- indicates it had a loss in 2004 after posting a profit in 2003. A company with losses in both years is designated -/-.
TOTAL SHAREHOLDER RETURN The percentage change in shareholder value from the beginning to the end of fiscal 2004, including reinvested dividends.
Accumulated Wealth
OPTION PROFITS The pretax gain received during fiscal 2004 by exercising vested options from previous years. This gain is the difference between the stock price on the date of exercise and the exercise price of the option.
TOTAL VALUE OF EQUITY HOLDINGS The value of shares held outright, based on the fiscal year-end stock price, plus the unrealized gains on all options held by the executive.
AVERAGES AND MEDIANS These figures take into account all 200 companies in the survey. Percentage changes reflect only the 179 companies that had the same chief executive in both 2003 and 2004.
EXECUTIVE PAY : My Big Fat C.E.O. Paycheck
By CLAUDIA H. DEUTSCH
THE spectacle of once-respected corporate titans doing perp walks - Martha Stewart, Bernard J. Ebbers, Richard M. Scrushy, the list seems endless - has pretty well tarnished the title of chief executive. But it has done little, it seems, to scratch the gilt from the corner office.
In fact, the boss enjoyed a hefty raise last year. The chief executives at 179 large companies that had filed proxies by last Tuesday - and had not changed leaders since last year - were paid about $9.84 million, on average, up 12 percent from 2003, according to Pearl Meyer & Partners, the compensation consultants.
Surely, chief executives must have done something spectacular to justify all that, right? Well, that's not so clear. The link between rising pay and performance remained muddy - at best.
Profits and stock prices are up, but at many companies they seem to reflect an improving economy rather than managerial expertise. Regardless, the better numbers set off sizable incentive payouts for bosses.
With investors still smarting from the bursting of the tech bubble, the swift rebound in executive pay is touching some nerves. "The disconnect between pay and performance keeps getting worse," said Christianna Wood, senior investment officer for global equity at Calpers, the California pension fund. "Investors were really mad when pay did not come down during the three-year bear market, and we are not happy now, when companies reward executives when the stock goes up $2."
Even when companies reported modest increases in executive pay, it was often because they shifted from stock options, which are listed as compensation as soon as they are doled out, to outright stock grants to be paid - and accounted for - down the road.
Of course, corporations have been wrestling for decades with ways to link pay to performance, with little success. In the 1980's, they tried tying cash bonuses to rising sales or earnings, only to find that the payouts encouraged executives to make decisions that yielded short-term results - and, often, longer-term disasters.
In the 1990's, companies tried stock options, figuring that they would be the best way to tie the executives' fortunes to those of shareholders. Instead, they prompted some managers to time decisions to pump up the stock just when their options vested. Bonuses and options at Tyco and Enron, for example, did little to prevent widespread accounting frauds at either company.
The secret to linking pay to performance remains elusive. Net income at Eli Lilly fell 29 percent and its return to shareholders dropped 17 percent last year, but its chief executive, Sidney Taurel, saw his pay go up 41 percent, to $12.5 million.
Similarly, Sanmina-SCI, the electronics contract manufacturer, has lost money in each of the last three years, and its shareholders' total return fell 27 percent last year, but the pay of its chief executive, Jure Sola, jumped to $15 million from $1.2 million in 2003.
SOME paychecks remained robust even if at first blush they looked reduced. Net income at Merck fell 15 percent last year, and total shareholder return dropped 28 percent. The summary compensation tables in the proxy show the pay of the chief executive, Raymond V. Gilmartin, dropping 39 percent, to $5.9 million from $9.6 million.
But Mr. Gilmartin may find it easy to recoup the perceived loss. He got far fewer options last year, but he is participating in a new long-term performance plan that will give him $2.7 million worth of shares next year if he meets earnings targets - and double that amount if he exceeds them by a set amount. He gets the shares even if the stock price does not rise by a dime. And the payments won't show up until the 2007 proxy.
Conversely, Apple Computer had a stellar 2004, yet Steven P. Jobs, its chief executive, was paid exactly $1 for his efforts. Why? Apple paid him in advance - in 2003, it gave him $75 million worth of stock.
Shareholders are not giving up on tying pay to performance. But now they seem less focused on how executives are paid and more concerned about exactly what they do to earn it.
"It's easy to manipulate stock price. It's even easier to manipulate earnings," said Paul Hodgson, a senior research associate at the Corporate Library, an investment research firm specializing in corporate governance. He, like others, is pressing companies to set pay based on measures that are harder to fudge, like return on capital employed.
Directors, meanwhile, are spending more time scrutinizing auditor reports and management strategies, looking for just such fudging. And for that, they've been rewarded. Pearl Meyer's data show that average total compensation of directors at 200 large companies probably topped $200,000, up from an average of $176,000 the previous year.
"Directors are meeting more often, so their meeting fees are up," said Jannice L. Koors, a Pearl Meyer managing director, "and there's clearly a sense that the liability they face, both personally and professionally, has increased, and thus warrants more pay."
Inflated pay for deflated performance has become ever more rankling to shareholders, many of whom are still scrambling to recoup the losses they suffered after the stock market imploded in 2000.
Few begrudge Daniel A. Carp, the chief executive of a newly revitalized Eastman Kodak, his $2,172,988 bonus this year, which brought his total compensation to about $4.4 million. But they are likely to squawk about the rich pay package - $7 million in salary and bonus, 5 million options and nearly $27 million worth of restricted stock - that Blockbuster awarded to John F. Antioco, its chief executive. After all, Blockbuster lost $1.25 billion last year.
Pay inflation will not end soon because companies are afraid to lose talent, said Ira Kay, who runs the executive pay practice at the consulting firm Watson Wyatt Worldwide.
Still, companies are rethinking the different pieces that make up a pay package. Many, for example, are reigning in common safety nets for chief executives - like contractual promises of huge severance if the company is acquired, or even if the C.E.O. is fired for incompetence.
They are also increasingly trying to link pay packages - most specifically, the size of bonuses, or the conditions attached to the vesting of restricted shares - to actual corporate performance, particularly total return to shareholders. "Finally, companies are focusing on the performance part of the pay-for-performance equation," Ms. Koors said.
Examples are easy to find. When net income at Aramark, a food services company, slid 13 percent, total pay for Joseph Neubauer, its chairman and chief executive, fell 20 percent - and his bonus shrank 47 percent. When net income at Unisys, the computer maker, plunged 85 percent last year, Lawrence A. Weinbach, then its C.E.O., got no bonus and saw his overall pay drop by 17 percent.
An even starker example is the arrangement for John R. Alm, who became chief executive of Coca-Cola Enterprises, the soft-drink bottler, in January 2004. His contract stipulates that he will lose all his restricted stock if he is no longer at the company when his shares vest in five years. More significantly, he will forfeit all the shares if the stock price has not climbed 10 percent at vesting time, and he will lose half of them if it has not increased by 20 percent.
Still, many shareholders are not satisfied. Reviewing C.E.O.'s pay - and how company boards' compensation committees set it - is at the top of the to-do list for many institutional investors and shareholder activist groups, now that they have succeeded in making companies more forthcoming about revenue, profits and other financial results.
"Whether compensation committees are effectively linking pay to performance is now a major corporate governance concern," said Martha L. Carter, a senior vice president of Institutional Shareholder Services, which advises big investors.
Only one concern - the proliferation of stock options - has abated. A new regulatory requirement to expense options, combined with a sluggish stock market that made many of them valueless in 2000 through 2003, has caused a stampede away from options. Several compensation consultants say they expect that options will soon represent less than 30 percent of total compensation, down from more than 60 percent today.
Not all alternatives are being warmly received. Shareholders decry plans that do not use "hard" measures of performance, such as total return to shareholders. For example, few are applauding Microsoft's two-year-old decision to grant restricted stock on the basis of customer satisfaction and market share, or Disney's plan to tie compensation to performance against the Standard & Poor's 500 index.
Shareholders do want companies to adopt "claw back" provisions that force executives to repay bonuses paid for results that later must be restated, a situation that has kept Qwest, for one, in the news this year.
They are also resisting rich change-of-control clauses that provide windfalls to any C.E.O. whose company is acquired, even if that chief gets a high-ranking job at the new company. The $95 million or so that James M. Kilts will probably receive as a result of selling Gillette to Procter & Gamble is raising ire even among those who laud his performance as Gillette's leader.
They also decry "pay for failure" contracts that heap riches on dismissed chiefs. Carlton S. Fiorina, for instance, left Hewlett-Packard with a severance package that included $14 million in pay, a $7.38 million bonus and $21.1 million in additional compensation from restricted stock holdings and pension payments.
Shareholders complain about how difficult it is for outsiders to glean such things as the tax implications of deferring executive compensation or the worth of supplemental retirement plans and other forms of "stealth compensation" that do not readily leap off the proxy. "The way the proxies are now, you can't really figure out how anyone, even Carly, got paid," Ms. Wood of Calpers said, referring to Ms. Fiorina.
Ms. Carter of Institutional Shareholder Services concurred. "Companies have simply got to do a better job of disclosing total pay packages, and how they play out in different scenarios, such as the C.E.O. being fired or the company being acquired," she said.
In January, for the first time, institutional shareholders, led by Calpers, invited top compensation consultants to a meeting in New York to discuss their concerns - and to persuade the consultants that they were part of the problem.
A TOP complaint was that the consultants feed data to compensation committees piecemeal, reporting what other companies are offering in supplementary pensions one day, the trend on bonuses a few days later, the value of stock options a week after that. The directors, in turn, set the different components of their own chief executive's pay package in equally disjointed fashion.
Consultants acknowledge the problem, and larger firms have begun to add up total compensation, both for peer-group companies and for the client's proposed pay package. "They used to only ask us for information about direct pay, because they got data about benefits and perks from others," said Pearl Meyer, chairwoman of Pearl Meyer & Partners. "But compensation committees are now taking a more holistic approach to executive pay, so we are now giving them all of the information."
Governance experts say the full board increasingly wants a better handle on compensation committee deliberations. Many directors fear that they will all be held accountable for egregious pay packages.
"The Dick Grasso situation has made a lot of directors more cognizant of the need to get the total picture, see how all the pieces - the base salary, restricted stock, options, perks, retirement benefits - add up," said Eleanor Bloxham, president of the Corporate Governance Alliance, a consulting firm in Westerville, Ohio.
She was referring, of course, to the brouhaha that arose when directors at the New York Stock Exchange said they were ignorant of the full extent of the pay package they had approved for the exchange's former chairman, Richard A. Grasso.
Several companies are voluntarily disclosing much more pay information to their shareholders. These companies have replaced what Ms. Koors called "the standard proxy boilerplate" - a statement that pay was set competitively - with fuller descriptions of how boards derived the packages they awarded.
The proxy for Becton Dickinson, for example, included a summary table that laid out the value of total compensation. Honeywell's proxy listed the value of perks like legal fees and personal use of corporate planes and cars. Siebel Systems has promised investors that next year it will begin disclosing the operational and stock-price hurdles that management must scale for restricted shares to vest.
"The companies know that new disclosure rules are coming, so they want an 'attaboy' from shareholders for being ahead of the curve and doing it voluntarily," Ms. Koors said.
Slowly but steadily, companies are responding to shareholders' clamor for pay packages to reward long-term thinking, too. This year's proxies show that companies increasingly insist that executives and directors hold about five times their pay in stock, thus making it harder for them to cash in on any short-term lift in the company's fortunes.
Cardinal Health, for the first time, is requiring its chief executive to hold shares equal in value to five times his salary, and its directors to hold the equivalent in shares of four times their annual retainer. Cendant this year increased its ownership rule for its chief executive to six times salary, from five.
"Companies are basically saying to their chiefs, 'We want to keep you on the hook, to make sure that you are not benefiting from a short-term gain that is not sustainable,' " Ms. Koors said.
EXECUTIVES who do not lead the company down a profitable path may find it harder to develop other ways to cash in.
Thomas J. Neff, the chairman of American operations at the executive recruiting firm Spencer Stuart, says he has seen a move away from grants of restricted shares that automatically vest after three or five years. In their place, companies are giving shares that vest only if the company hits preset goals for book value, total return or other measures the board deems crucial to success.
Mr. Neff says that fewer companies are agreeing to automatically vest all options or restricted shares if the chief leaves and that many now offer one or two years of compensation, maximum, upon departure, a sharp drop from the three to five years of pay that used to be routine. "Boards are no longer routinely letting the C.E.O.'s lawyer draft the contract," he said.
Several companies have clearly learned from past mistakes. The contract of L. Dennis Kozlowski at Tyco International called for an immediate payout of about $135 million if he was dismissed, and a retainer of $3.4 million annually for the rest of his life. His voluntary resignation released Tyco from the terms of the agreement, but directors clearly are cognizant of how expensive fulfilling the contract terms could have been.
Tyco's new severance policy limits compensation to twice the executive's base salary and bonuses at the time of termination. In a merger or change-of-control situation, departing executives would receive up to 2.99 times their base salary and bonus. And Tyco now awards stock options that are priced higher than the share price on the day of issue.
Directors are less likely to clamp down on the pay of newly recruited bosses. Consider the package for C. John Wilder in his first year as the TXU Corporation's chief executive: $1 million in salary, a $16 million bonus and $37 million in long-term incentives.
Newcomers have boards at a negotiating disadvantage, compensation experts say. Because they took a gamble by switching jobs, most successfully insist on either a hefty sign-on bonus in cash and stock, or a soft landing - that is, rich severance - in case they fail.
Both eventualities get shareholders' dander up, but experts say the boards have little choice.
"You need to supercharge the offer," Mr. Neff said, "to create an incentive for a person to come in."
April 3, 2005
An Early Advocate of Stock Options Debunks Himself
By CLAUDIA H. DEUTSCH
FIFTEEN years ago, Michael C. Jensen, a professor at the Harvard Business School, wrote a paper with Kevin J. Murphy, then a professor at the University of Rochester, that trumpeted some pretty radical ideas for the time. Compensation systems, they posited, prompted chief executives to add revenue, not to increase profit, pay dividends or otherwise reward long-suffering shareholders. Their suggestion was to make stock options a big component of top management's pay, ensuring that they do well only if shareholders do well. "It seemed a way to tie managers tighter to the mast," Professor Jensen recalled recently.
Of course, it turned out to be anything but. In far too many cases, stock options tempted managers to pick strategies, schedule deals and investments, even juggle the numbers, so that the company looked best when it came time to exercise those options.
So in 2001, Mr. Jensen, by then a professor emeritus, debunked his own theories in another paper, this time castigating the profusion of stock options in executive pay.
Mr. Jensen, now 65, is still not done with the subject. He has written a book about the issue, tentatively titled "C.E.O. Pay and What to Do About It," that the Harvard Business School Press has scheduled for publication next winter. In a telephone interview from his home in Sarasota, Fla., he expounded on his past and current thoughts.
Q. What made you interested in executive compensation in the first place?
A. All through the 70's and 80's, systems that rewarded bad things and punished good ones arose like moss on trees. Compensation committees rewarded executives for acting like bureaucrats, for growing the size of the company, even if they destroyed products and businesses and market value in the process. That's what led to the conglomerate craze and takeover premiums of the 60's - and why it took the raiders and buyout specialists to sort it all out in the 70's.
Q. So chief executives weren't earning their pay?
A. It's not that I thought C.E.O.'s were overpaid; in fact, I felt they were underpaid in relation to lawyers and other professionals. But it seemed they were paid in the wrong way, independent of whether market value increased or decreased on their watch. Stock options seemed the best way to create an automatic relationship between the reward to the shareholder and the reward to the decision maker.
Q. After you proposed this in the Harvard Business Review, the use of stock options grew rapidly. But then you soured on the idea. Why?
A. Compensation committees wrongly looked at options as free, and awarded too many to too many people. It diluted the stock. And most stock option programs still rewarded management for building the empire, not the actual value. There was no penalty for investing in projects that did not return the cost of capital. When those projects pumped up the stock, management got a big win - but the shareholders would have still done better if the money had been paid out in dividends.
Q. Lots of companies are switching away from stock options to outright grants of restricted stock. Does that solve the problem?
A. No. Say I offer you $1 million in restricted stock - even if you think the stock will go down 10 percent, you're still getting $900,000, and you're happy as a clam. I'd be handing over a large amount of wealth, yet penalizing executives only slightly for the decline in the value of the stock.
Q. So the maximum stock price is the holy grail?
A. Absolutely not. Warren Buffett says he worries as much when one of his companies becomes overvalued as undervalued. I agree. Overvalued equity is managerial heroin - it feels really great when you start out; you're feted on television; investment bankers vie to float new issues.
But it doesn't take long before the elation and ecstasy turn into enormous pain. The market starts demanding increased earnings and revenues, and the managers begin to say: "Holy Moley! How are we going to generate the returns?" They look for legal loopholes in the accounting, and when those don't work, even basically honest people move around the corner to outright fraud.
If they hold a lot of stock or options themselves, it is like pouring gasoline on a fire. They fudge the numbers and hope they can sell the stock or exercise the options before anything hits the fan.
Q. Are you suggesting that executives be rewarded for driving down the price of the stock?
A. I'm saying they should be rewarded for being honest. A C.E.O. should be able to tell investors, "Listen, this company isn't worth its $70 billion market cap; it's really worth $30 billion, and here's why."
But the board would fire that executive immediately. I guess it has to be preventative - if executives would present the market with realistic numbers rather than overoptimistic expectations, the stock price would stay realistic. But I admit, we scholars don't yet know the real answer to how to make this happen.
Q. But then, does it really make sense to judge executives entirely by market value? Why not reward them for setting, and meeting, stretch targets for, say, revenue or profits?
A. It's too easy to game the target-setting process. Nobody has an incentive to provide accurate data or to worry about the company as a whole.
I knew a beverage company manager who deliberately underforecast how much product he could sell during holiday season; the company believed him and cut back on production. It lost a fortune in missed sales, but he got a huge bonus for exceeding his estimates.
I also knew some executives at an equipment company who shipped their product unassembled, so they could book the revenue in a particular quarter. The company spent a fortune on labor to assemble the product in the customer's warehouse. Profits suffered, but the executives got their bonuses.
Q. O.K., then let's stick with the idea of rewarding executives for creating market value. But is it time to abandon stock options and grants, and just link bonuses to stock price?
A. Not at all. A correctly designed option, adjusted for the cost of capital minus the dividends, would not pay off unless an executive really created incremental value. That means executives only get paid if shareholders are in the money, too.
And even better, why not give executives a chance to bet on their own strategies? Let them put their own money into projects they recommend. Or at least make them pay for stock options. If the stock is selling at $100, make them pay $10 for an option they can exercise at $90. That way they at least have a downside.
That also gets to the question of repricing stock options when share prices fall. With most stock plans, that just gives management a heads-I-win-tails-you-lose situation. But it would be O.K. to offer to sell them more options at a lower strike price.
Q. What about indexing options to peer companies? Is it fair to penalize management when an entire industry is out of favor with investors?
A. Yes, it is fair. When you say, "I'll measure your performance relative to your peers in the industry," you remove the incentive to get the company in the right industry. Do you really want executives to say, "I don't care if we're in a declining industry; I'll get my bonus if we're the best."? With that kind of thinking, I.B.M. might have stayed in the typewriter business instead of moving into computers.
Q. Reformers want companies to expense options, or to let shareholders approve pay packages. How much of a difference will these changes make?
A. When boards stop thinking options are free, there'll be fewer options granted, and to fewer people. When companies were forced to recognize the present value of pension obligations and long-term health care provisions, they cut back on those plans.
Q. Does a company's compensation system weigh heavily when you are picking stocks to buy?
A. Hypothetically, it would. But I sold virtually everything I could in March of 2000, and I've continued to sell the illiquid holdings as they became freed up. I got out pretty much whole, and I've never gone back in.
April 3, 2005
Listing Perks, but Not as an Endangered Species
By PATRICK McGEEHAN
PRESSED by shareholder advocates and securities regulators, companies are starting to be more forthcoming about the corporate jets, company cars and other perquisites they give their executives on top of their salaries, bonuses and stock awards. But judging by the latest batch of proxy statements, many companies have not reined in executives' regal lifestyles.
The amounts of money spent on executive perks - as tallied in the catch-all category labeled "other compensation" - vary widely, and they rise and fall inexplicably. Most often, the cash goes to sweeten corporate officers' health care benefits and retirement accounts. But there are other popular perks that stretch beyond the office, like the annual bill for the chief executive's membership in some exclusive club.
When Robert J. Genader was promoted to chief executive of the Ambac Financial Group last year, for example, he received a $100,000 raise in his salary, to $525,000. But he did not use the extra money to cover the $40,000 initiation fee at a club he joined (but has not identified). Ambac shareholders paid for that, as well as $11,637 in membership fees, according to the company proxy.
Ambac shareholders will continue to pay to keep Mr. Genader in good stead at the club, a company spokesman said. But they may not see the bills. Under rules set down by the Securities and Exchange Commission, a company does not have to report any of the perks it hands out to a senior executive as long as the total value does not exceed $50,000 a year.
Sometimes, a single perk easily exceeds that limit. When, for example, Derek V. Smith, the chairman and chief executive of ChoicePoint, a seller of consumer data in Alpharetta, Ga., joined a country club in 2003, shareholders put up $150,000 for his initiation. Last year, his annual club dues were only $21,058, but ChoicePoint had to disclose them as part of his total package of perks, which came to $553,403 and included financial advice and use of the company jet.
Similarly, Bank of America had to disclose that it spent $35,889 for "monitoring and servicing home security systems and the provision of secured parking" last year for Kenneth D. Lewis, its chairman, chief executive and president, only because he received other perks worth $159,000. He was paid $22 million in cash, stock and options.
Some companies, like Commerce Bancorp, leave the perk-picking to its officers. In its proxy last year, Commerce said that from 2001 through 2003, it had given discretionary "expense allowances" of more than $450,000 to Vernon W. Hill II, its chairman, and $150,000 to George E. Norcross III, the chairman and chief executive of its commerce insurance division. That was in addition to country club dues of $3,564 for Mr. Hill and $2,322 for Mr. Norcross.
Honeywell also gives its executives money - "cash flexible perquisite payments" - to spend as they see fit. Last year, four senior executives received a total of $179,000. David M. Cote, the chairman and chief executive, was not one of them, though he had received $55,000 in this category over the two previous years.
Honeywell also gives its top executives an annual allowance - as much as $50,000 each - to spend on perks like financial planning and club memberships, said Robert Ferris, a company spokesman. Last year, four executives spent a total of $179,000, he said.
Those payments were part of a long list of perquisites laid out in a chart in Honeywell's proxy, which has become a model for disclosure, said Paul Hodgson, who analyzes proxy statements at the Corporate Library in Portland, Me. On one page, he said, it listed the nine components of "other annual compensation," from the personal use of company cars and planes to reimbursements for taxes.
For the five highest-paid officers, it added up to more than $850,000 last year, though that was down from more than $1.1 million in 2002, Mr. Ferris said. "Our summary compensation table is a great example of how we are providing information in what we believe is an easier-to-read and more comprehensive format," he said.
The flap over the corporate apartment, flower arrangements and other perks that General Electric gave to John F. Welch Jr. when he retired as its chief executive in 2001 has spurred directors of many big companies to ask more about perks. Some are also sharing the information with the investing public.
Last fall, the Securities and Exchange Commission reached a settlement with G.E. over claims that it did not disclose all the details of Mr. Welch's package, which the S.E.C. said was worth $2.5 million a year. G.E. did not admit any fault but agreed to make a full disclosure of other retirement packages it hands out.
PEARL MEYER, the chairwoman of Pearl Meyer & Partners, the compensation consulting firm in New York, said she had been frustrated by executives' refusal to give up perks that seem the most frivolous.
"We're trying to influence our clients to get rid" of such perks, Mrs. Meyer said. "Executives find it difficult to give up these perquisites, which they see as symbols of their achievement and to which they have formed emotional attachments."
Even some associates in Mrs. Meyer's corporate family have yet to drop the habit, however. The 2005 proxy for Clark Consulting, the parent company of Pearl Meyer & Partners, shows that its chairman and chief executive, Tom Wamberg, received perks worth $101,452, including "personal use of country club and health club dues."
April 3, 2005
A Bad Year for the Chief (but Not for the Bonus)
By ERIC DASH
IT'S hard to find three chief executives who had a tougher year than Carleton S. Fiorina, Raymond V. Gilmartin and Michael D. Eisner. But you would never guess that from the size of their annual bonuses.
At Hewlett-Packard, Ms. Fiorina was forced to step down after directors concluded that her strategy wasn't working. But the board reinstated part of her bonus after a strong fourth quarter, so she still managed to pocket $1.57 million.
At Merck, Mr. Gilmartin collected a $1.38 million bonus for 2004, despite the fact that Vioxx, its top-selling pain medicine, was pulled from the shelves late last year; investors pulled out of the company's stock even faster.
At Disney, Mr. Eisner was the subject of a shareholder revolt. Recently, he announced that he would retire this September, a year earlier than he had planned. No matter. He received a $7.25 million bonus for the company's "greatly improved" fiscal performance in 2004, according to Disney's proxy statement.
The fact that all three made out so well underscores a trend in executive pay last year: the big bonus is back. Over all, the median bonus of chief executives was worth over $1.9 million, up more than 38 percent from the previous year, according to data from Pearl Meyer & Partners for 179 large companies.
But did they earn it? It's hard to say. Boards sometimes base annual bonuses on nonfinancial criteria, like leadership quality, that give them some flexibility.
The bonus bonanza reflects a variety of trends. For starters, profits are up by more than 20 percent across corporate America. And as the growth of executive salaries has slowed, boards have offered higher annual cash rewards to make up some of the difference, compensation specialists say. More recently, the prospect of reporting stock options as expenses has caused more boards to shift from equity-based pay to cash bonuses.
The upshot is that in 2004, the median annual bonus for a C.E.O. was slightly larger than his or her salary, according to an analysis of 293 large public companies by Equilar, the compensation analysis firm. In 2001, it would have approached only two-thirds of base salary.
Bonuses have also been buoyed by tax changes. In the early 1990's, the Internal Revenue Code used tax deductions to encourage companies to link pay to performance goals approved by shareholders. The reforms said nothing, however, about how high or low the bar could be set.
There has been some good news for shareholders. For example, more compensation committees are setting goals based on internal business fundamentals like profit growth, operating margins and investment returns on equity and capital. Fewer are tying bonuses to measures that more easily lend themselves to manipulation, like stock market returns or earnings per share.
"I think there is an evolution of performance measurements that is happening," said Donald Delves, the president of the Delves Group, a compensation consulting firm based in Chicago. "We are seeing better goal-setting."
Even some executives are beginning to realize that things may be getting out of hand. Robert I. Toll, the chief executive and co-founder of Toll Brothers, a luxury housing company, was on track to receive a bonus worth almost $50 million last year amid the recent housing boom.
With the company's share price soaring and Mr. Toll handily meeting all the performance goals set for him, his bonus would have been more than twice the amount he took home in 2003 - and almost eight times the $6.6 million he was awarded in 2001.
But last October, Mr. Toll and the board "mutually agreed" to effectively give back $20 million of his bonus, said Joel H. Rassman, chief financial officer of Toll Brothers.
"Although Mr. Toll believes he is worth a lot of money, he believed the amount of money he would have earned was more than he should be receiving as C.E.O.," Mr. Rassman said. "So did the compensation committee. So did the board."
Now that's something to build on.
Tables: 2004 Executive Compensation
http://www.nytimes.com/2005/04/03/business/yourmoney/03method.html?pagewanted=print&position=
How the Pay Figures Were Calculated
To measure executive compensation, Sunday Business studied 200 large public companies that had filed proxies by Tuesday for last year. Pearl Meyer & Partners, the compensation practice of Clark Consulting, compiled and analyzed the data from corporate filings. The tables appear here and here. For the Hauls of Fame click here.
This study focuses on cash, stock, stock options and other forms of compensation paid to executives in the companies' 2004 fiscal years. The total compensation figures exclude gains from stock options awarded in past years but exercised in 2004. Those gains appear separately, in the column labeled "option profits."
Payments that are called "retention grants," "sign-on bonuses" and other forms of compensation intended to attract or retain executives over a number of years are included in their entirety in the year reported. Prorating these grants and counting only a part of them in the year they were given can be misleading if a company decides to give other multiyear grants before the term of the first award has expired. Showing data on an "as reported" basis offers the truest picture of annual pay. Counting actual pay also highlights years in which companies grant unusually small or large numbers of shares.
To calculate the value of options, Pearl Meyer used a pricing model that has been recommended by accounting rule makers and is similar to the widely used Black-Scholes formula. The model estimates the present value of options grants, based on a number of grant-date assumptions, including the exercise price, the dividend rate, the historical volatility of the stock and the option expiration date. The model also takes into account vesting restrictions imposed on option recipients and the likelihood that the options will be exercised before they expire.
For chief executives who served only part of the fiscal year in that position, the study annualizes their salaries based on either disclosed employment contract information, or prorates their salaries based on their time as chief executive. Other compensation elements are not prorated.
Following are definitions for columns in the tables:
2004 Compensation
BASE SALARY Annual pay that does not depend on the company's results. By law, any amount exceeding $1 million is not tax deductible by the company.
BONUS An annual cash payment that depends on the company's performance or the board's discretion.
RESTRICTED STOCK AND LONG-TERM INCENTIVES The value, as reported by the company, of restricted stock grants plus other cash or equity incentive payments that are tied to multiyear performance. Typically, an executive must remain employed to claim restricted shares. Long-term incentives are usually earned based on the company's results over a three- to five-year period. Restricted stock is generally reported in the year granted; long-term incentives are most often reported in the year paid because their vesting is contingent on meeting certain future performance targets.
TOTAL DIRECT COMPENSATION The sum of the three previous categories and the reported value of "other compensation." Other compensation covers two broad categories: miscellaneous nonperformance pay, like moving expenses and personal use of a corporate jet, and the value of benefits like contributions to 401(k) plans and company-paid premiums for supplemental life insurance. Executives with other compensation of more than $500,000 for fiscal 2004 are noted with a {dagger} symbol.
OPTION GRANT VALUE The estimated value is based on a pricing model that is similar to the Black-Scholes formula.
TOTAL COMPENSATION The sum of total direct compensation and the option grant value.
Pay and Performance
TOTAL DIRECT COMPENSATION The percentage change in salary, bonus, long-term incentives and "other compensation" from 2003 to 2004. This figure is calculated only for companies in which the chief executive held the position for both years. Companies with new chief executives in 2004 are designated as "N.A."
TOTAL COMPENSATION The percentage change in total compensation - direct compensation and options - from 2003 to 2004. This figure is calculated only for companies in which the chief executive held the position for both years. Companies with new chief executives in 2004 are designated as "N.A."
COMPANY NET INCOME The percentage change in the net income from fiscal 2003 to fiscal 2004. The symbol -/+ designates that companies had a profit in 2004 after posting a loss in 2003, and +/- indicates it had a loss in 2004 after posting a profit in 2003. A company with losses in both years is designated -/-.
TOTAL SHAREHOLDER RETURN The percentage change in shareholder value from the beginning to the end of fiscal 2004, including reinvested dividends.
Accumulated Wealth
OPTION PROFITS The pretax gain received during fiscal 2004 by exercising vested options from previous years. This gain is the difference between the stock price on the date of exercise and the exercise price of the option.
TOTAL VALUE OF EQUITY HOLDINGS The value of shares held outright, based on the fiscal year-end stock price, plus the unrealized gains on all options held by the executive.
AVERAGES AND MEDIANS These figures take into account all 200 companies in the survey. Percentage changes reflect only the 179 companies that had the same chief executive in both 2003 and 2004.
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Date: 2005-04-05 02:16 pm (UTC)